The NPS was introduced amid much fanfare by the previous government, as a much needed reform in social security. This far-reaching initiative was intended to serve as a vehicle for retirement savings. Five years down the line, there are very few takers for the scheme, even among Central government employees.

The NPS, introduced in 1 January, 2004, is mandatory for Central government employees who joined service on or after that date. The scheme was subsequently opened to all citizens on voluntary basis with effect from 1 May, 2009. Citizens, especially in the non-government segment, have shown complete apathy towards the NPS. The number of non-government subscribers to NPS registered as of 21 October 2009 is a minuscule 2,321. The response from government employees too is not very encouraging. The total Central government employees registered under the NPS is just 5,38,276 and in case of State government employees, the figure stands at a mere 1,10,024. Considering that there are more than 50 lakh government employees in India, these numbers indicate the true extent of penetration achieved by the NPS.

To popularise the scheme, the Pension Fund Regulatory and Development Authority (PFRDA) has appointed 22 Points of Presence (PoPs) and six Pension Fund Managers for offering NPS to citizens. Branches of the registered PoPs designated as PoP Service Providers (PoP-SP) act as the initial point of contact and collection points for all citizens other than government employees desiring to obtain a Permanent Retirement Account Number (PRAN) under NPS. There were in all 798 PoP-SP branches as of 16 October 2009, and between them, these branches have managed to collect only 2,291 application forms so far. The poor response to NPS can be attributed to several reasons like higher enrolment cost, lack of confidence in the system and absence of distributors. Also, distributing and managing NPS funds is not exactly a profitable proposition. – Sanket Dhanorkar [email protected]

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Banks have been advised to maintain provisioning coverage ratio, including floating provisions at 70% by September 2010. What does this signify for banks with less provisioning?

Banking regulator Reserve Bank of India (RBI) in its second quarter review of monetary policy has set a deadline of September 2010 for banks to step up their loan loss provisioning, including floating provisions, to 70%. RBI has advised banks to do so with a view to improving the provisioning cover and enhancing the soundness of individual banks. It has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks. At present, the provisioning requirements for NPAs range between 10% and 100% of the outstanding amount, depending on the age of the NPAs, the security available and the internal policy of the bank.

However, this could have adverse effects on banks whose provisioning at present stands much below the stipulated 70%. State Bank of India, ICICI Bank, IDBI Bank, Bank of India and Canara Bank are likely to face the heat, given that their NPA provisioning as of date is well below 70%. According to a research report by Sharekhan, effectively, if the banks spread the additional required provisions equally over the next four quarters, the additional provisions would form 32.2%, 19.0% and 22.2% of the FY2010 estimated bottom line of IDBI Bank, SBI and ICICI Bank respectively.” KR Choksey Research says in its report, “The mandated coverage ratio of 70% will have varied impact on banks. SBI, ICICI Bank and Canara Bank will see increasing provisioning requirements impacting their bottom line significantly.”

Shankar Narayanaswamy, head of credit analysis, Standard Chartered Bank, says in his report, “These banks are likely to witness a significant decline in profitability over the next four quarters to accommodate the higher provisioning requirement. We might see some impact from this quarter onwards as ICICI Bank, SBI and BOI have yet to announce their results for H1-FY10.” However, he does not see this move impacting the banks’ capital. He adds, ”We do not envisage any capital shock for these large banks as a result of this increase in provisioning requirement, as the net income for the next four quarters should adequately cover the extra provisioning required to reach the overall 70% coverage level. However, this might hasten moves to raise equity capital in the near term.”

Anand Shanbhag, head of research, Avendus Capital, feels that banks’ earnings will be weighed down by stiffer NPL provisioning norms. He says, “Profits for the next four quarters are likely to be weighed down by the mandated rise in specific provision cover to 70% by end of September 2010. RBI data for end of March 2009 reveals that 21 of the 28 public sector banks and, 16 of the 22 private banks, reported provision cover below 70%.”

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United Breweries, the Vijay Mallya-promoted group is not exactly flying high these days, if the latest quarterly results are anything to go by. Performance was mixed at the two leading arms of the UB group—United Breweries and United Spirits. Maker of popular whisky brand McDowell’s No.1, United Spirits posted a sharp 26% decline in September quarter net profit, due mostly to high operating costs and interest payments. Net profit plunged to Rs69.60 crore from Rs93.90 crore a year earlier.

Operating profits grew marginally by 1%. Although sales volume increased 10% to 22.9 million cases, it was far below the 15% volume growth reported by the company in previous quarters. Raw material prices increased 26% while employee costs soared 66% due to special incentives. Interest costs almost doubled to Rs75.10 crore. The company, in a statement, said that the second quarter of the fiscal year is traditionally the slowest for the industry.

India’s largest beer maker United Breweries doubled its net profit to Rs11.71 crore from Rs5.16 crore during the same period last year, but operating profits rose only 4% over the same period. The company’s results were also helped by a strong contribution from the ‘other income’ component, which saw a 42% jump. The owner of Kingfisher brand of beer, United Breweries has been facing stiff competition from strong brands like Fosters, Heineken, Budweiser and Tuborg, which are perceived to offer better quality of beer.

Dr Mallya’s blatant exuberance in investing huge amounts in unprofitable ventures is also likely to hurt UB group’s performance. His investments in fancy projects like IPL franchise Bangalore Royal Challengers and Formula1 team Force India have provoked a lot of scepticism. Although the IPL outfit managed to achieve breakeven in its first year of operations despite languishing at the bottom of the points table, it is uncertain how they would be able to sustain profitability, given the high marketing and advertising spends. Meanwhile, Force India continues to incur losses, both on and off the track. –Sanket Dhanorkar[email protected]